Lecture 11 Slides with Solutions to Practice Exercises

Management Accounting Overview

• Course: ACC5040 Semester 1 – 2024/25

• Lecture 11: Chapters 16 & 17 – Standard Costing & Variance Analysis

• Instructor: Dr. Sarah G. Mohamed (Sarah.Mohamed@bcu.ac.uk)

Session’s Agenda

• Discuss Moodle Quiz 3

• Review key takeaways from Chapters 16 & 17

• Additional practice exercises

• Assess the use of standard costs & budgeting

Moodle Quiz 3 Details

• Date: Thursday 12th December 2024

• Open: 10am Thursday 12th

• Closes: 10am Friday 13th

• Duration: 40 minutes

• Content Covered:

  • Chapter 15: The Budgeting Process

  • Chapters 16 & 17: Standard Costing and Variance Analysis

  • Associated lectures and seminars (Lectures 7-10 and Seminars 8-11)

• Format: 15 multiple-choice questions, combining numerical exercises and theoretical questions.

Quiz Instructions

• Quiz is available for 24 hours; complete in the allotted time once started.

• It is an open-book quiz but must be completed individually.

• Review course content and practice exercises before the quiz.

• Students requiring extra time must email by Monday 9th December, including supporting documents.

Key Takeaway Points from Chapters 16 & 17

Static Budget

• Definition: A static budget refers to the Master Budget and is a planning device based on fixed budgeted output levels determined at the budgeting period's beginning.

• Calculation: Static Budget = Budgeted Output Level (BO) x Budgeted Price (BP).

Level 1 Variance Analysis

• Formula: Actual Results - Static Budget Amount = (Actual Output x Actual Price) - (Budgeted Output x Budgeted Price)

• Also Known As: Static/Fixed Budget Variance.

• Total Variance Calculation: Total Static Budget Variance = Actual Income - Static Budget Income.

Flexible Budget

• Definition: A flexible budget calculates budgeted revenue and costs based on actual outputs.

• Formula: Flexible Budget = Budgeted Price (BP) x Actual Output (AO).

• Facilitates calculations for Level 2 Variance Analysis.

Level 2 Variance Analysis

• Formula: Flexible Budget Variance = Actual Results - Flexible Budget Amount.

• Insights Gained: Shows variance attributed to changes in actual unit costs and prices from budgeted ones.

• Sales Volume Variance Calculation: Sales Volume Variance = (Flexible Budget Amount - Static Budget Amount).

Level 3 Variance Analysis

• Applicable to all product costs; direct materials and labor have price and efficiency variances.

• Direct Material Variances:

  • Price Variance = AQ x (AP - SP)

  • Efficiency Variance = (AQ - SQ) x SP

• Direct Labor Variances:

  • Price Variance = Actual Hours x (AR - SR)

  • Efficiency Variance = (Actual Hours - Standard Hours) x SR.

Link Between Level 2 & 3 Variance Analysis

• Flexible Budget Variance can be derived from either analysis, showing equivalencies between them.

Fixed Overhead Cost Variance

• Fixed Costs Spending Variance = Actual Total Fixed Costs - Budgeted Total Fixed Costs.

Benefits of Using Price and Efficiency Variances

• Helps management understand differences between actual and planned production costs due to price changes and input levels.

Practice Exercises

Case Study: Apple Valley Orchards, Inc. (AVO)

• Standard costs for AVO's Grandma's large apple pie developed in 2023.

• Budgeted Costs: Direct materials: 1.5 pounds at £7.25/pound; Direct labor: 0.25 hours at £14/hour.

• Production in September: 1200 pies, utilizing 1875 pounds of materials and 280 labor hours.

• Various Calculations:

  • Material Flexible-Budget Variance Calculation: £75 unfavorable.

  • Material Price Variance Calculation: £468.75 favorable.

  • Material Efficiency Variance Calculation: £543.75 unfavorable.

  • Direct Labor Price and Efficiency Variances calculated to manage labor costs effectively.

Assessing the Use of Standard Costs and Budgeting

• Standard costs facilitate detailed variance examinations and offer insights into operational performance.

• Comparison Use: Variances serve as early warning signs for managers and can influence performance evaluations and strategic decision-making.

Using Sensitivity Analysis with Budgeting

• Sensitivity analysis examines how results vary with changes to predicted data; useful for understanding the impact of varying parameters.

Issues with Budgeting & Standard Costs

• Potential problems may arise concerning human behavior, such as budget manipulation by employees.

• Budgetary Slack: Intentionally underestimated revenues or overestimated expenses to make budget targets easier to achieve.

Limitations of Variance Analysis

• Focus solely on financial performance can neglect critical non-financial metrics.

• Risk of exacerbating employee anxiety while undervaluing their contributions, potentially leading to the loss of skilled workers.

Preparation for Next Week

• Complete seminar 12 exercises on Moodle; attend lecture 12 on Tuesday, 10th December for final exam format and preparation guidelines.